Key to China cabinet’s reforms is follow-through

WenXiu

BEIJING (Caixin Online) — It has been two weeks since the State Council announced a policy that aims to reshape the financial industry and strengthen its support for economic rebalancing.

As with every grand policy design, however, there is the risk that it may not go to plan. Many of the experts Caixin spoke to voiced concerns on implementing the policy.

Much of the plan is simply a restatement of what the government had already committed itself to, thus implementation in the past fell short, an expert who has been following the cabinet’s decision-making said.

About Caixin
Caixin is a Beijing-based media group dedicated to providing high-quality
and authoritative financial and business news and information through
periodicals, online and TV/video programs.
• Get the Caixin
e-newsletter

The key to whether efforts will succeed this time, he said, depends on how well the policy is carried out in practice.

The plan is known as “Jin Shi Tiao” in Chinese, or 10 financial measures, because it sets out that many principles to guide financial reform. These include making better use of the existing stock of money, promoting industrial upgrading, diversifying the capital market and deepening the participation of private investors in the financial sector.

Regarding these measures, a number of executive-level bankers said they think the overall money supply would be fairly adequate for the reform, but whether it can be used as leverage to promote structural adjustment is an open question.

They foresaw three likely problems. First, projects in progress will still take up much of the existing money supply. There is no reliable estimate for how much capital can be freed up and redirected to sectors where growth can contribute to a more balanced economy.

A banking executive said his bank voluntarily decided to cut credit lines to electricity companies, highway builders, and developers of urban infrastructure and property.

The bank expected to receive 450 billion yuan ($73.3 billion) in loan repayments from these sectors this year, but would have to lend out 400 billion yuan
USDCNY, +0.4041%
to them again. That means only 50 billion yuan worth of credit could be made available to other borrowers, he said.

Reuters

Chinese one yuan coins and 100 yuan banknotes

The second problem concerns bad loans. With the economy slowing, many companies have been relying on borrowing new loans to repay old ones, so cutting off or reducing their credit lines means banks’ non-performing loans would surge, the bankers said.

The third — and perhaps the most challenging issue — they say, is finding a way to match funds with the right borrowers.

Making better use of the stock of money is one of the policy’s focal points. Along the same lines, the government has restricted bank lending to property developers and local government financing platforms.

Will banks channel funds collected from the repayment of these loans to other industries and companies? That’s unlikely, especially under the current circumstances, an executive at a joint-stock bank said.

He gave two reasons. On the one hand, banks are under pressure to squeeze more profit out of making loans with deposits at hand because they have been forced to rein in off-balance-sheet operations, which are more profitable. This leads to higher interest rates on loans. But on the other hand, only property developers and financing platforms can afford the rising cost of capital.

The profit margin for traditional manufacturing companies is too thin to absorb the cost, while high-tech, fledgling small businesses usually don’t have much collateral for bank loans, he said.

Following government money

Some company managers said they would like to heed the central government’s rebalancing calls, but fear that the rules don’t apply equally to everyone.

One executive of a large state-owned enterprise, for example, said his company had been cutting output capacity in areas discouraged by industry policies. However, its market share has been steadily eroded by competitors that filled in the gaps with lower-quality goods.

A few years later, he said, it turned out that excess capacity in those areas had worsened still.

A banker who oversees corporate lending voiced a similar concern. The current policies about industrial upgrading draw a line between companies that should stop production and those that are allowed to carry on. This creates an incentive for those that aren’t far below the line to double down on, rather than decrease, their investments, he said.

Banks have played an enabling role in all this, a local banking regulator said. “In the pursuit of their own interests, they pander to bureaucrats’ desires and follow wherever government money leads.”

This is supposedly where the new policy should come into play. A measure that says “private capital can be allowed to set up private banks at their own risk on a trial basis,” is expected to be a milestone toward engaging private investors in the financial industry.

China scraps controls on lending rates

(4:53)

China took a key step in its drive to liberalize its financial system on Friday, announcing it would scrap its curbs on lending interest rates.

Proponents say that it will diversify the investment channels for private capital, invigorate the economy and force state-owned banks in particular to improve their pricing mechanism and services.

Some experts are unimpressed. A local banking regulator said many city commercial banks are already owned by private investors to a large extent, but they are still subject to administrative intervention.

Some even seek government intervention.

A typical way of subordinating themselves to bureaucrats is having their chairman or president appointed by the government because doing so often leads to preferential treatment and, when things go wrong, there is a greater chance that officials will bail them out, he said.

This means “problems cannot be solved by just bringing in private capital,” he said.

“If a private bank’s chairman is more concerned about whether he or she can be elected into the NPC or the CPPCC, then the bank isn’t going to be any different than a state-controlled financial institution,” he said, referring to the National People’s Congress and Chinese People’s Political Consultative Conference.

So the cure may not lie in how many shares private investors can hold in a bank, the executive of a financial institution said.

“If commercial banks’ senior managers are measured not by administrative ranking but by performance, and if banks are not evaluated by market share but the value they create, their behavior will naturally change,” he said.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.